TKC (9746) FY2026 Q3 Earnings Report

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Executive Summary

The key takeaway from this earnings report is that revenue and earnings increased, primarily driven by higher profitability in the Local Government Business, indicating a structural improvement in profit margins. Revenue amounted to ¥67.55B (+13.0% YoY), Operating Income was ¥16.53B (+26.8%), Ordinary Income was ¥17.11B (+27.4%), and Net Income was ¥11.75B (+24.5%), with all indicators recording double-digit growth. The Operating Income margin expanded by +2.7pt YoY to 24.5%, also benefiting from a decline in the SG&A ratio accompanying revenue growth (46.4%, -0.3pt YoY).

Factors Driving Performance Changes

【Revenue】Revenue was ¥67.55B (+13.0% YoY), with the Local Government Business posting substantial revenue growth of ¥25.33B (+36.1%), driving overall company growth. The core Accounting Firm Business recorded stable growth at ¥39.97B (+2.8%), while the Printing Business was essentially flat at ¥4.16B (-0.1%). The Local Government Business’s share of total revenue rose to 37.5%, indicating a continued mix shift toward the high-margin segment.

【Profit and Loss】Operating Income increased 26.8% to ¥16.53B, and the Operating Income margin expanded to 24.5% (+2.7pt YoY). Operating Income in the Local Government Business surged 304.3% to ¥6.92B, with a margin of 27.3%, lifting the company-wide margin. In contrast, the Accounting Firm Business reported a 15.6% decline in Operating Income to ¥9.29B, suggesting that expenses such as personnel and outsourcing costs preceded revenue generation. Non-operating income increased to ¥0.61B from ¥0.46B in the previous year, mainly due to higher dividend income. Extraordinary losses were limited to ¥0.10B, including an impairment loss of ¥0.07B, and were not material enough to impair recurring earnings power. Net Income was ¥11.75B (+24.5%). Overall, the company can be concluded to have achieved both revenue and earnings growth.

Segment Analysis

By segment, the Local Government Business expanded sharply, with revenue of ¥25.33B (+36.1%), Operating Income of ¥6.92B (+304.3%), and a margin of 27.3%, making it the largest driver of company-wide earnings growth. The core Accounting Firm Business remained resilient, with revenue of ¥39.97B (+2.8%), but Operating Income declined 15.6% to ¥9.29B, and its margin fell to 23.2% (down YoY), indicating that higher costs are pressuring profitability. The Printing Business remained a low-margin operation, with revenue of ¥4.16B (-0.1%), Operating Income of ¥0.32B (+1.6%), and a margin of 7.7%. Profit-margin disparities between segments have widened, creating a structure in which cost management in the Accounting Firm Business will determine the direction of the company-wide margin going forward.

Key Financial Indicators

【Profitability】The Operating Income margin increased to 24.5% (+2.7pt from 21.8% in the previous year), while the Net Income margin rose to 17.4% (+1.6pt from 15.8% in the previous year). Overall margins improved due to an increase in the gross margin to 70.9% (+2.4pt YoY) and a decline in the SG&A ratio to 46.4% (-0.3pt YoY). 【Investment Efficiency】ROE was 10.6%, comprising Total Asset Turnover of 0.52x and Financial Leverage of 1.17x, with the improvement in the Net Income margin serving as the primary driver. 【Financial Soundness】The Equity Ratio was extremely high at 85.5% (improving from 83.6% in the previous year), with cash and deposits of ¥37.52B substantially exceeding current liabilities of ¥15.64B. Non-current liabilities were small at ¥3.19B, indicating limited dependence on interest-bearing debt. 【Cash Flow Quality】Accounts receivable and notes receivable totaled ¥11.39B. Contract liabilities of ¥1.44B provide partial support for future revenue, while non-operating income of ¥0.61B represented only 0.9% of revenue, indicating that the majority of earnings consisted of Operating Income from the core business.

Cash Flow Analysis

As the company did not disclose a statement of cash flows in this earnings report, cash trends are analyzed based on changes in the balance sheet. Cash and deposits totaled ¥37.52B, up from ¥36.88B in the previous year, maintaining a high ratio of approximately 72% of total current assets of ¥52.21B. Accounts payable declined by approximately 31% to ¥2.28B from ¥3.33B in the previous year, suggesting shorter payment terms or changes in transaction conditions; however, given the cash balance, the impact on liquidity is immaterial. Investment securities increased to ¥24.86B from ¥21.19B in the previous year, indicating that part of the company’s cash has been invested in securities alongside an increase in valuation differences. Overall, both cash and investment securities are accumulating against a backdrop of strong cash generation from operating activities, and no financial constraints are apparent.

Quality of Earnings

Current-period earnings were centered on Operating Income of ¥16.53B generated from recurring business activities. Non-operating income of ¥0.61B was limited in scale, equivalent to 0.9% of revenue, and primarily comprised dividend income of ¥0.46B, which represents recurring income. Extraordinary losses were small at ¥0.10B, including an impairment loss of ¥0.07B. The ¥5.36B difference between Ordinary Income and Net Income was primarily attributable to corporate income taxes and other taxes at an effective tax rate of approximately 31.0%, indicating limited distortion from non-recurring items. Comprehensive income was ¥14.40B, ¥2.65B higher than Net Income of ¥11.75B; this difference was mainly due to an increase in valuation differences on investment securities and therefore does not represent the underlying earnings power of the business. Overall, current-period earnings can be assessed as high-quality earnings derived from the core business.

Earnings Forecasts and Guidance

Progress toward the full-year forecasts of revenue of ¥86.80B, Operating Income of ¥17.60B, and Ordinary Income of ¥18.10B was 77.8% for revenue, 93.9% for Operating Income, and 94.5% for Ordinary Income, indicating that profit items are significantly ahead of schedule. As results through Q3 were progressing at a pace exceeding the earnings forecasts, the company revised upward both its earnings forecasts and dividend forecasts, including an increase in dividends, during the current quarter. The acceleration in progress appears to have been primarily driven by growth in high-margin projects in the Local Government Business and improved SG&A efficiency.

Shareholder Returns

The company has already paid an interim dividend of ¥55. For the fiscal year-end, it forecasts ¥71, consisting of an ordinary dividend of ¥55 and a special dividend of ¥16, resulting in a full-year dividend of ¥126, an increase from ¥60 in the previous year. The Payout Ratio against the company’s forecast EPS of ¥248.93 is approximately 50.6%. Given cash and deposits of ¥37.5B and the low level of liabilities, there is limited concern regarding dividend sustainability. The company has indicated a policy of increasing dividends through a combination of ordinary and special dividends, demonstrating an approach to shareholder returns aligned with earnings growth.

Risk Factors

1. Profitability disparity between segments: The core Accounting Firm Business, which accounts for 59.2% of total revenue, reported a 15.6% decline in Operating Income, with increases in personnel and outsourcing costs pressuring profitability. Cost control in this segment will be a key focus in maintaining the quality of company-wide earnings.

2. Increasing dependence on the public sector: The Local Government Business’s share of total revenue has risen to 37.5% and accounts for 41.9% of company-wide Operating Income. The company is becoming more exposed to a structure that is susceptible to bidding systems, budget cycles, and policy changes.

3. Lengthening collection period for trade receivables: Accounts receivable and notes receivable totaled ¥11.39B, representing approximately 16.9% of revenue. This level requires ongoing monitoring of the credit and collection processes.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Profitability indicators significantly exceed the industry median, positioning the company at a high level within the IT and telecommunications industry.

Growth and Capital Efficiency

The revenue growth rate also exceeds the industry median but has not reached the IQR upper bound of 19.9%, placing the company’s growth at a mid-to-high level within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Report

1. The Operating Income margin expanded to 24.5% (+2.7pt YoY) due to an improved business mix and greater SG&A efficiency. The improvement in margins has been supported by a higher proportion of high-margin projects in the Local Government Business. Whether this structural improvement is sustainable and the order trends in that business from Q4 onward will be key areas to monitor.

2. Although the core Accounting Firm Business achieved revenue growth, Operating Income declined 15.6%, widening the margin gap with the Local Government Business, which is driving company-wide margin expansion. Progress in improving the cost structure of this business will determine the direction of company-wide performance going forward.

3. Progress toward the full-year forecast exceeded 90% for profit items, and both the earnings forecast and dividend forecast were revised upward. The full-year dividend is ¥126, with a Payout Ratio of approximately 50.6%, and the company continues to maintain its shareholder return stance supported by a robust Equity Ratio of 85.5%.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It does not represent a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥2,323–¥2,456 at Cost of Equity ±1%, and ¥2,385–¥2,393 at ω±0.1.

Notes:

• As Net Income progress toward the full-year forecast is 91%, exceeding the standard 75%, forecast EPS has been adjusted upward within a maximum range of +10% (because companies progressing ahead of schedule tend to exceed their forecasts; adjustments may be excessive for businesses with strong seasonality).
• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not forecast or guarantee the future share price.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with professionals as necessary.

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AI Financial Analysis

Executive Summary

TKC delivered a strong FY2026 Q3 cumulative earnings result, with revenue growth translating into materially faster operating-profit growth. Revenue increased 13.0% year on year to ¥67.55bn. Operating income rose 26.8% to ¥16.53bn. Ordinary income increased 27.4% to ¥17.11bn. Net income attributable to owners grew 24.5% to ¥11.75bn. Gross profit expanded 16.9% to ¥47.87bn, outpacing revenue growth. The gross margin improved by 240bp year on year to 70.9%. The operating margin improved by 266bp to 24.5%, reflecting substantial operating leverage. The net margin rose by 160bp to 17.4%. SG&A expenses increased 12.3%, marginally below revenue growth, and the SG&A-to-sales ratio declined by approximately 31bp to 46.4%. The Local Governments Business was the principal earnings driver, with segment profit increasing more than fourfold to ¥6.92bn. Conversely, the Accounting Office Business remained the largest revenue contributor but its segment profit declined 15.6% to ¥9.29bn despite revenue growth. Non-operating income of ¥0.61bn was mainly supported by ¥0.46bn of dividend income, but remained modest relative to revenue. Net income included a ¥0.93bn net extraordinary loss, principally a ¥0.66bn impairment loss, which was immaterial to the overall earnings trajectory. The balance sheet remains exceptionally conservative, with equity comprising 85.5% of assets and cash and deposits of ¥37.52bn. Full-year guidance was revised and Q3 progress is well ahead of the usual seasonal benchmark for profit, indicating a favorable earnings setup entering Q4. The revised annual dividend forecast of ¥126 per share, including a ¥71 year-end dividend, implies a balanced combination of shareholder return and earnings retention.

Profitability Analysis

The reported annualized ROE is 14.1%, comprising a 17.4% net profit margin, 0.693x asset turnover, and 1.17x financial leverage. The return profile is therefore primarily driven by high earnings margins rather than leverage, consistent with TKC's net-cash and equity-rich capital structure. Financial leverage is low and does not represent a material source of return enhancement or financial risk. The most important year-on-year change was margin expansion: gross margin rose 240bp, operating margin rose 266bp, and net margin rose 160bp. Gross profit growth of 16.9% exceeded the 13.0% sales increase, while SG&A grew 12.3%, demonstrating positive operating leverage. Operating income growth of 26.8% was consequently more than twice the sales growth rate. The Accounting Office Business is the core business by external revenue, generating ¥39.92bn of sales, or 59.1% of consolidated revenue. However, its segment profit fell to ¥9.29bn from ¥11.01bn, and its segment margin declined to 23.2% from 28.3%, warranting attention despite modest 2.8% revenue growth. The Local Governments Business produced ¥25.33bn of revenue, up 36.1%, and segment profit of ¥6.92bn, up 304.3%; its segment margin expanded to 27.3% from 9.2%. The Printing Business generated external revenue of ¥2.29bn, down 1.3%, while segment profit rose 1.6% to ¥0.32bn; profitability remains modest relative to the two software and public-sector-facing businesses. The FY2026 Q3 operating margin of 24.5% is well above the 15% threshold generally associated with excellent profitability. The 14.1% annualized ROE is in the upper end of the good range, although it remains slightly below the 15% excellent benchmark because TKC carries a substantial equity base and liquid financial assets.

Growth Assessment

Revenue growth was broad enough to lift consolidated sales by ¥7.80bn year on year, but the composition was heavily tilted toward the Local Governments Business. Local Governments Business revenue increased by ¥6.72bn, accounting for most of the consolidated sales increase, while its ¥5.21bn segment-profit increase more than offset the decline in Accounting Office Business profit. The Accounting Office Business's revenue increase of ¥1.10bn did not convert into higher segment profit, making its margin recovery an important determinant of the sustainability of group-level profitability. Printing Business revenue was broadly stable but does not represent a meaningful source of consolidated growth. The FY2026 full-year forecast calls for revenue of ¥86.80bn, operating income of ¥17.60bn, ordinary income of ¥18.10bn, and net income of ¥12.85bn. At Q3, progress against full-year guidance is 77.8% for revenue, 93.9% for operating income, 94.5% for ordinary income, and 91.4% for net income. Revenue progress is close to the standard 75% Q3 pace, whereas operating-income progress is 18.9 percentage points ahead, ordinary-income progress is 19.5 points ahead, and net-income progress is 16.4 points ahead. This implies that the revised forecast embeds a comparatively low Q4 profit contribution or management has retained a conservative outlook. The forecast implies only 4.0% full-year sales growth and 9.0% operating-income growth, below the Q3 cumulative growth rates, reinforcing the conservative arithmetic. Recurring software, cloud-service, and maintenance demand characteristics in the Accounting Office Business and public-sector system implementation and renewal cycles in the Local Governments Business should remain central to revenue durability. The unusually strong Local Governments Business contribution should be assessed against tender timing, implementation milestones, and municipal IT budget cycles.

Financial Health

TKC's liquidity is very strong, with a current ratio of 333.9% and a quick ratio of 329.6%. Current assets of ¥52.21bn exceed current liabilities of ¥15.64bn by ¥36.57bn. Cash and deposits of ¥37.52bn alone are more than 2.4 times current liabilities. Inventories are only ¥0.66bn, or 0.5% of total assets, limiting inventory obsolescence and inventory-financing exposure. Total liabilities are ¥18.83bn, equal to only 14.5% of total assets, while total equity is ¥111.12bn. The debt-to-equity ratio of 0.17x is conservative and far below the 2.0x warning threshold. Interest expense was only ¥0.03bn, producing an interest coverage ratio of 5,510.67x; financing costs are therefore immaterial to earnings. There is no apparent maturity mismatch, as liquid current assets substantially exceed short-term obligations. Investment securities totaled ¥24.86bn, or 19.1% of total assets, and rose ¥3.74bn year on year; the portfolio adds financial-asset and market-valuation sensitivity, although valuation gains also supported comprehensive income. Accounts payable declined ¥1.05bn, or 31.4%, to ¥2.28bn, reducing spontaneous supplier financing but posing no liquidity concern given cash resources. Treasury stock became less negative by ¥1.70bn to negative ¥1.36bn, a 55.7% movement that increased the reported equity base and should be monitored as part of capital-management activity. Provision for bonuses declined to ¥1.41bn from ¥5.31bn, consistent with a significant reduction in this liability category at the reporting date. Contract liabilities increased to ¥1.44bn from ¥1.39bn, providing a modest source of advance-funded revenue visibility. Intangible assets account for 5.5% of total assets, a moderate level that does not indicate balance-sheet concentration in acquired or capitalized intangibles.

Notable B/S Changes

Treasury stock: improved by ¥1.70bn to negative ¥1.36bn (+55.7%) - the less-negative balance increased reported equity; capital-management activity should be tracked alongside dividends and any share transactions. Accounts payable: decreased by ¥1.05bn to ¥2.28bn (-31.4%) - supplier financing declined, although the effect on liquidity is immaterial given the ¥37.52bn cash balance and 333.9% current ratio. Provision for bonuses: decreased by ¥3.90bn to ¥1.41bn (-73.5%) - a large change in accrued employee compensation liabilities that affects short-term working-capital composition. Investment securities: increased by ¥3.74bn to ¥24.86bn (+17.6%) - the portfolio now represents 19.1% of assets, increasing exposure of comprehensive income and equity to market-price movements.

Cash Flow Quality

Dividend Sustainability

The revised FY2026 dividend forecast is ¥126 per share, comprising the ¥55 interim dividend and a ¥71 year-end dividend. The planned year-end dividend includes a ¥55 ordinary dividend and a ¥16 special dividend. Against forecast EPS of ¥248.93, the full-year dividend payout ratio is approximately 50.6%. This is below the 60% sustainability benchmark and leaves meaningful earnings retention capacity. The Q3 cumulative dividend payout ratio of 23.5% reflects only the ¥55 interim dividend relative to nine-month net income and should not be treated as the full-year payout rate. The balance sheet provides substantial support for the distribution policy, with ¥37.52bn of cash and deposits, ¥111.12bn of equity, and low leverage. The special-dividend component means the ordinary dividend run rate should be distinguished from the total distribution when evaluating recurring shareholder returns. The forecast net income of ¥12.85bn provides approximately 2.0x coverage of the implied aggregate annual cash dividend of about ¥6.33bn based on 50.24 million issued shares. The indicated policy appears financially sustainable on forecast earnings and balance-sheet strength.

Risk Assessment

Business risks include Accounting Office Business profitability risk: segment profit declined 15.6% to ¥9.29bn and segment margin fell by roughly 510bp despite 2.8% revenue growth, creating a risk that cost inflation, product mix, or customer-acquisition spending persists., Public-sector execution and budget-cycle risk: the Local Governments Business generated most of the consolidated earnings increase, so delays in municipal procurement, system migration, implementation, or acceptance could materially affect growth and margins., IT-service industry risk: cybersecurity incidents, data-privacy breaches, service outages, and technology obsolescence could damage customer trust and increase remediation and compliance costs., Competitive risk: accounting software, cloud platforms, and local-government system providers compete on product functionality, regulatory adaptation, implementation capability, and customer support..

Financial risks include Investment-security valuation risk: investment securities of ¥24.86bn represent 19.1% of total assets, and changes in market prices can affect comprehensive income and equity., Dividend-income sensitivity: dividend income of ¥0.46bn represented the largest component of non-operating income, exposing ordinary income modestly to investee distribution policies., Impairment risk: the current period recognized a ¥0.66bn impairment loss in the Accounting Office Business, indicating that the carrying value and future cash generation of relevant assets require monitoring..

Key concerns include The earnings mix has shifted sharply toward the Local Governments Business; sustaining group profit growth requires either continued public-sector strength or stabilization in Accounting Office Business margins., The revised full-year forecast appears conservative relative to Q3 profit progress, so the conversion of the remaining earnings opportunity into results will be a key assessment point., The special dividend enhances FY2026 shareholder return but should not be assumed to represent the recurring ordinary-dividend base..

Investment Implications

Key takeaways include Revenue grew 13.0%, while operating income and net income grew 26.8% and 24.5%, respectively, evidencing strong operating leverage., Operating margin improved to 24.5% and annualized ROE reached 14.1%, supported by a high-margin, low-leverage business model., The Local Governments Business was the decisive growth engine, with segment profit rising to ¥6.92bn from ¥1.71bn., The Accounting Office Business remains the largest revenue base but saw segment-profit contraction, making its cost and margin trend strategically important., Liquidity and solvency are exceptionally strong, with a 333.9% current ratio, 0.17x debt-to-equity ratio, and ¥37.52bn in cash and deposits., The revised ¥126 per-share dividend implies an approximately 50.6% forecast payout ratio, which is consistent with the company's earnings capacity and conservative balance sheet..

Metrics to watch include Accounting Office Business revenue growth, segment profit, and segment margin, Local Governments Business order timing, project delivery, revenue recognition, and margin persistence, Q4 operating-profit conversion relative to the revised ¥17.60bn full-year operating-income forecast, Investment-security valuation movements and dividend income, Further impairments and the operating performance of assets associated with the ¥0.66bn impairment charge, The recurring ordinary dividend level versus special-dividend components.

Regarding relative positioning, TKC exhibits profitability and balance-sheet characteristics that are strong for a Japanese IT-services and business-software provider: a 24.5% operating margin, 17.4% net margin, 14.1% annualized ROE, minimal financing burden, and substantial liquidity. Its relative operating position is strengthened by the exceptionally profitable FY2026 Q3 performance in the Local Governments Business, while the weaker margin trend in the larger Accounting Office Business is the principal counterweight.